Analysts cheer Disney's Pixar buy

DavidB. Wilkerson

CHICAGO (MarketWatch) -- Walt Disney Co.'s deal to acquire Pixar Animation Studios for $7.4 billion makes plenty of strategic sense, analysts said Wednesday while noting that the price tag may water down the entertainment titan's profits in the near term.

Pixar shareholders will get 2.3 shares of Disney stock for every Pixar share they own. The transaction is expected to close this summer. See full story.

Doug Mitchelson at Deutsche Bank Securities called the move a "bold foray" by Chief Executive Bob Iger, who assumed Disney's top post only last fall.

"In a way, it appears that Iger has returned Disney to its roots with this deal as the creative heart of the company will once again be a highly successful animation unit," Mitchelson said in a note.

As for the blue chip's stock, "we expect the market, given greater confidence in Disney's growth prospects, will become comfortable paying what we believe is a more reasonable multiple," he said.

In reaffirming his buy rating on Disney shares, Mitchelson said he sees a 30% upside potential to his fiscal 2006 price target of $36, as well as stronger growth prospects for Disney than for its peer group.

Addressing concerns about whether the business cultures of Disney and Pixar can mesh, Laura Martin at Soleil/Media Metrics says she believes Bob Iger is "one of the few people in Hollywood who can work with" Jobs, who is the top executive at Apple Computer
AAPL, -1.92%
as well as Pixar.

Jobs butted heads with former Disney chieftain Michael Eisner in a rift that led Pixar and Disney to break off talks of an extension of their relationship in 2004. Iger is given credit for repairing relations between the companies.

In addition to shoring up Disney's animation unit, which was dominant for decades but turned lackluster in the years since Pixar's 1995 emergence, the acquisition "reinforces the company's commitment to focus its resources on content production," Reif Cohen told clients in a research note.

Pixar's much higher price-to-earnings ratio makes the deal dilutive for Disney. Reif Cohen estimates that Disney's earnings will be diluted by 4 to 5% in fiscal 2007, and by 3% in the following year.

She notes, however, that Disney's plan to buy back all the shares it used to acquire Pixar by the end of fiscal 2007 -- much more aggressive a repurchase program than she had anticipated, leaving open the possibility that it could outperform her earnings estimates for the year.

Styponias agrees that Disney's animation studio will be bolstered by the acquisition, and says it's likely that Pixar will eventually ramp up its production schedule to release more than one movie per year.

Disney's shares fell 55 cents, or 2.1%, to close at $25.44, while Pixar rose 45 cents, or less than 1%, to $58.02.

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